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5 Top Semiconductor ETFs

Technology stocks have performed extremely well lately, and semiconductor companies in particular have seen their prospects improve dramatically. Demand for chips has come from a wide variety of industries, and the need for connectivity even in areas outside the traditional tech sector has led to major cyclical upturns for key players in the semiconductor space. If you want to benefit from the industry's overall gains without picking stocks, then exchange-traded funds could be the best way to get the exposure you want. The following five semiconductor ETFs offer different ways to track this lucrative market, but they all have the potential to share in strong returns at modest expenses.

Semiconductor ETF

Assets Under Management

Expense Ratio

5-Year Average Annual Return

iShares PHLX Semiconductor (NYSEMKT: SOXX)

$1.12 billion

0.48%

23.5%

VanEck Vectors Semiconductor (NYSEMKT: SMH)

$919 million

0.36%

22.4%

Direxion Daily Semiconductor Bull 3x (NYSEMKT: SOXL)

$362 million

1.06%

64.5%

SPDR S&P Semiconductor (NYSEMKT: XSD)

$327 million

0.35%

23.3%

PowerShares Dynamic Semiconductors Portfolio (NYSEMKT: PSI)

$286 million

0.63%

24.4%

Data source: Fund providers.

Comparing the two big players in semiconductor ETFs

Most of the ETFs above have a lot in common with each other, with the primary distinguishing factor typically being the index the fund chooses to track. For the leading iShares semiconductor ETF, that choice is clear: the Philadelphia Stock Exchange's PHLX Semiconductor index, which is a modified market cap-weighted index of companies primarily involved in the design, distribution, manufacturing, and sale of semiconductors. About 85% of the fund is invested in semiconductor manufacturers, while the remaining 15% goes to stocks that produce the semiconductor manufacturing equipment those companies use to make chips. The top five stocks out of the fund's 30 total holdings make up about 40% of the portfolio, giving the fund a respectable concentration among top players without being too focused on industry leaders. U.S. stocks represent more than four-fifths of the fund's assets.

The VanEck semiconductor ETF follows the MVIS U.S.-Listed Semiconductor 25 Index, holding 26 stocks. Holdings are tilted a bit more toward the more mature companies in the space, including the leading PC microprocessor producer and Taiwan's major manufacturer of semiconductors. On the whole, though, the two funds share most of the same stocks, and it's typically the order in which they appear that provides the biggest difference between them. The VanEck fund has a slightly more global flavor, with 25% exposure to Asia, 5% to Europe, and the remaining 70% to North American companies.

Image source: Getty Images.

Drilling down on semiconductors

Among smaller players in the semiconductor ETF space, you'll find different approaches to the space. The SPDR ETF includes solar power companies, which are major users of semiconductor materials in solar panels. That exposure has benefited the fund so far in 2017, although it has introduced an element of volatility that goes with the cyclical nature of the solar industry. Returns have been consistent with other semiconductor ETFs despite the very different dynamics of the solar business.

The PowerShares ETF uses a set of qualitative and quantitative guidelines to pick and weight semiconductor stocks. Among the factors are stock price momentum, earnings momentum, management action, business quality, and value. Yet despite the added hoops that the ETF jumps through, its portfolio ends up looking quite similar to those of its ETF peers, albeit with slightly more equal weighting among the fund's 30 stocks.

Finally, the Direxion fund is a leveraged ETF, using derivatives to produce daily returns equal to three times the rise or fall in the underlying tracking index. In a bull market for semiconductors, that strategy has been very effective. There are risks involved for investors in leveraged ETFs, and there's no guarantee that longer-range fund results will always be so close to triple the long-term performance of its unleveraged counterparts. For short-term tactical trading, many investors turn to the Direxion fund for quick semiconductor exposure.

Which semiconductor ETF should you own?

Niche ETFs like these semiconductor funds are appropriate for investors who want to go beyond what broader ETFs offer and instead get specific exposure to the industry. The leveraged ETF isn't recommended for long-term investment, but any of the remaining four would be suitable for those looking for their particular respective approach to the semiconductor space.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.